Tuesday, January 31, 2017
Book Review: The Big Short: Inside the Doomsday Machine by Michael Lewis
This book tracks the movie pretty much dead-on (I rewatched the movie and started reading the book later that night.) For some reason most of the characters in the movie have small details and their last names changed. But it is the story of what happened in the mid 2000s with sub-prime mortgages, collateralized debt options, and credit default swaps. Don't worry if you don't understand the words quant and tranch—he'll explain them, but also you don't need to know. He tells the big picture in a way that the intricate details are erroneous.
The best thing he does is tell stories. That's how, in all of his books, he makes the complicated relatable. In this book he focuses on three groups of people who saw the crisis coming and capitalized on it: Dr. Mike Burry, the team at Front Point including mostly Steve Eisman, and Jamie and Charlie of Cornwall Capitol, the "garage band of hedge funds." Cornwall is really two thirty-year-old guys who saved up $110,000 and started investing and who want to buy these hedges but can't because they're too small and too unconnected. Dr. Burry and Mr. Eisman are running real investment firms—Burry's independent, and Eisman's as a part of Morgan Stanley. So we have three different players, none of them big, who all see this coming from different vantage points, and who want to short the sub-prime mortgage market but, at the beginning, don't even know how. Dr. Burry has to talk firms into creating short positions he wants to buy because they never existed before.
All of these teams are also fascinating in their owns ways: how they came across this niche of industry, how they figured out it was wobbly, how they managed to get their action, and why. For most of them it wasn't purely about money. And for me, as an American who bought a condo in 2008 (sigh, I know. But no, I got a conventional 30-year mortgage.) the most crucial thing in this book is an explanation of how this can happen, and the horrible realization that something like it can happen again as the ratings companies aren't reformed, the firms don't have enough capitol, and they're not regulated enough to not try to leverage and manipulate markets like they did. It won't be the same thing next time—although some investment firms have come up with a new name and a new marketing campaign for what are essentially investments in sub-prime mortgages all over again—but it will be similar enough that you should just know that it's coming.
The book was utterly riveting. I read it standing in the kitchen waiting for the water to get warm, I read it while brushing my teeth, I read it while waiting for my toast, I read it every possible minute and finished it in just two days. If you're remotely interested in this type of book, you must read it.
I bought this book at Savoy Bookshop in Westerly, RI.